Lilly(Eli) & Company (LLY) — Q4 2021 Earnings Call Transcript

Good morning. Thank you for joining us for Eli Lilly and Company’s Q4 2021 Earnings Call. I’m Kevin Hern, Vice President of Investor Relations. And joining me on today’s call are Dave Ricks, Lilly’s Chair and CEO; Anat Ashkenazi, Chief Financial Officer; Dr. Dan Skovronsky, Chief Scientific and Medical Officer; Anne White, President of Lilly Neuroscience; Ilya Yuffa, President of Lilly International; Jake Van Naarden, CEO of Loxo Oncology at Lilly and President of Lilly Oncology; Mike Mason, President of Lilly Diabetes; and Patrik Jonsson, President of Lilly Immunology and Lilly U.S.A. We are also joined by Lauren Zierke, Kento Ueha and Sara Smith of the Investor Relations team. During this conference call, we anticipate making projections and forward-looking statements based on our current expectations. Our actual results could differ materially due to a number of factors, including those listed on Slide 3. Additional information concerning factors that could cause actual results to differ materially is contained in our latest Form 10-K and subsequent Forms 10-Q and 8-K filed with the Securities and Exchange Commission. The information we provide about our products and pipeline is for the benefit of the investment community. It is not intended to be promotional and is not sufficient for prescribing decisions. As we transition to our prepared remarks, please note that our commentary will focus on non-GAAP financial measures. Now I will turn the call over to Dave.

Thanks, Kevin. 2021 was another outstanding year for Lilly as we delivered strong top and bottom-line growth and positive pivotal readouts for five important assets with the potential to launch in the next two years. As we move into 2022, we continue to build on this foundation and are determined to deliver on our long-term outlook to drive top-tier revenue growth, expand operating margins and innovate to develop and launch new medicines for patients that address significant unmet needs. Unpacking our 2021 performance on Slide 4, you can see the progress we have made on our strategic deliverables. Q4 revenue was up 8% and was driven by volume growth of 11%. While excluding revenue from COVID-19 antibodies, revenue grew 6% for the quarter and 10% for the full-year. This volume-driven performance is attributable to our key growth products, which grew by 28% and now account for 61% of our core business in Q4. On our non-GAAP, gross margin was 76.1% in Q4, a decrease of approximately 250 basis points, driven by increased sales of COVID-19 antibodies, which have a lower gross margin profile. Our non-GAAP operating margin was 31.7%, representing a decrease of approximately 130 basis points as a result of the lower gross margin percentage just mentioned. For pipeline milestones, we have shared several important updates since our Q3 earnings call, including additional positive Phase III readouts for mirikizumab in ulcerative colitis and lebrikizumab in atopic dermatitis. The initiation of a rolling submission in the U.S. for pertibrutinib in mantle cell lymphoma and our submission of bebtelimumab to the FDA for emergency use authorization for the treatment of mild to moderate COVID-19. We also continue to put our cash flow to work to create long-term value and recently announced our plans to make significant investments in new manufacturing sites in both North Carolina and Ireland. These investments will bolster the resilience and capacity of our supply chain as we launch new products to drive meaningful long-term growth. In addition, this quarter, we announced strategic research collaborations focused on new modalities as we continue to augment internal discovery capabilities. Finally, on financials, we announced a 15% increase to the dividend for the fourth consecutive year. And in Q4, we distributed nearly $800 million to shareholders via the dividend and completed another $750 million in share repurchases. Moving to Slides 5 and 6, you will see a list of key events since our Q3 earnings call, including several important regulatory, clinical, business development and COVID-19 therapy updates we are discussing today or that were part of the discussion during our December 15 Investment Community Meeting. So now I will turn the call over to Anat to review our Q4 and full-year 2021 results.

Thanks, Dave. Slides 7 and 8 summarize financial performance in the fourth quarter and full-year 2021. I will focus my comments on non-GAAP performance. In Q4, revenue grew 8% and revenue, excluding COVID-19 antibodies, increased 6%, highlighting solid momentum for our core business. Full-year revenue growth was 10% on that latter basis. Gross margin as a percent of revenue declined 250 basis points to 76.1% in Q4. The decrease in gross margin percent was driven by higher sales of COVID-19 antibodies, with shipments this quarter of bamlanivimab and etesevimab also having a lower gross margin profile compared to bevalinuzumab sales in the base period. Total operating expenses grew 5% this quarter. Marketing, selling and administrative expenses increased 2%, while R&D expenses increased 7%, driven by higher development expenses for late-stage pipeline opportunities, including donanemab, pirtobrutinib and tirzepatide, which were partially offset by lower development expenses for COVID-19 therapies. We invested approximately $40 million in research and development for COVID-19 therapies in Q4, bringing our total COVID-19 R&D investment to approximately $400 million for the full-year. Operating income increased 3% compared to Q4 2020 and operating income as a percent of revenue was 31.7% for the quarter, a decrease of 130 basis points. This decrease was driven by lower gross margin percent, partially offset by lower marketing, selling and administrative expenses as a percent of revenue. Full-year operating margin was 29.9%, in line with our expectations. Other income and expense was an expense of approximately $7 million this quarter compared to an expense of $31 million in Q4 2020. Our Q4 effective tax rate was 10.3%, a decrease of 280 basis points driven primarily by net discrete tax benefits. At the bottom line, we delivered solid growth as earnings per share rose 8% in Q4 and 20% for the full-year. On Slide 9, we quantify the effect of price, rate and volume on revenue growth, and we continue to be encouraged by the growth seen across key geographies.

Thank you, Anat. 2021 was a remarkable year for Lilly’s pipeline. We delivered positive data on five molecules: tirzepatide, tenenumab, pirtobrutinib, mirikizumab and lebrikizumab, all of which have the potential to launch in the next two years, and we are excited about the potential of these molecules hold for patients. In addition, we launched and submitted several key new indications for in-market products, including important new indications for Verzenio and Jardiance. And also, we advanced our early-stage pipeline. Just a few weeks ago, we provided an extensive R&D update across our therapeutic areas and shared our excitement about the next wave of innovation coming from Lilly. As a result, today’s R&D update will be brief and focus on the progress we have made since our last earnings call. Slide 14 shows select pipeline opportunities as of January 31, and Slides 15 and 16 show a recap of 2021 key events and potential key events for 2022. In Diabetes, with the recent submission in Japan, we have now submitted tirzepatide across all major geographies for the treatment of type 2 diabetes. We look forward to potential approvals for this important medicine this year.

Thanks, Dan. Before we move to Q&A, let me summarize the progress we made during 2021. We delivered strong revenue growth in our core business, propelled by our key growth products. We continue to invest heavily in our pipeline and made significant progress in 2021 generating positive Phase III data for five new potential medicines: tirzepatide, donanemab, pirtobrutinib, mirikizumab and lebrikizumab that we expect we will launch in the next two years. We also delivered positive data and launched important new indications for Jardiance and Verzenio, while we continue to bolster our pipeline through business development with a focus on new modalities. Finally, we returned $4.35 billion to shareholders via the dividend and share repurchases. And for the fourth consecutive year, announced a 15% dividend increase. As we move into 2022, we are excited to continue the progress of turning pipeline value into cash flow, starting with the potential launch of tirzepatide and the submissions of donanemab, pirtobrutinib, mirikizumab and lebrikizumab. These opportunities remind us that our purpose has never been more relevant and highlight the promise of turning science into treatments or cures for some of the most challenging human diseases like diabetes, obesity, Alzheimer’s, cancers and autoimmune disorders. We are steadfast in our commitment to improve the lives of millions of patients who rely on us and are confident in our business outlook. So now I will turn the call over to Kevin to moderate the Q&A session.

Thanks, Dave. We would like to take questions from as many callers as possible. Lois, please provide the instructions for the Q&A session, and then we are ready for the first caller.

So first, Dan, can you just give us a little bit of the thought process for pushing out the accelerated filing for donanemab, it certainly makes sense. But how much did the NCD actually work into that calculus versus needs or requests from the agency for additional data? And then the second question, just really wanted to get a better understanding of where you guys think this SURMOUNT-1 data set, where the thresholds would be. We are seeing 68-week data from Wegovy coming in at about 15% to 17% in a non-diabetic patient population. Just wanted to get a sense of some of the pushes and pulls that we should be thinking about in the context of the SURMOUNT-1 data set. Thanks so much.

Thank you, Seamus. It is a good question. Look, I think, as I said, the purpose of accelerated approvals is to try and get medicines to help patients faster. Without access, that benefit is mainly negated, unfortunately, and clearly, a very frustrating period for patients to have approval of a drug and no reimbursement. So the CMS draft NCD proposal weighed heavily in our considerations around timing and clearly reduces some of the ability to help patients faster than we were hoping for the accelerated approval. With respect to the other part of your question, which is how about requests from the FDA or new data or anything like that, there are none of those factors here. We haven’t had such requests. So it is really about CMS and about our own team’s ability to just get all of the data together and get the right amount of safety data compiled in a way that the FDA can analyze. So we will continue to work towards accelerated approval yet this year, but no longer in Q1.

Yes. Thanks for the question. We are excited to see this SURMOUNT-1 data. There is good theory on why someone who lives with obesity would have greater weight loss on a product like tirzepatide than those that have type 2 diabetes. Those theories tend to play out when we looked at the Novo semaglutides step program where those who didn’t have type 2 diabetes had six or seven percentage points greater weight loss than those that had type 2 diabetes. We don’t know what it is going to turn out to be for SURMOUNT-1. We do believe that it is going to be higher in the non-type 2 diabetes patient than what we saw in the SURPASS studies. The good thing is we don’t have to wait too long for those results. We expect those in the first half of this year. So we will be patient and look for the results. And I think we will be excited by what we see.

Hi good morning and thank you very much for taking my questions. The first one is around the N3pG4 in RLAD, you are starting a second agent fairly quickly. Can you talk about other distinguishing features for this product versus donanemab? Is it just that removes BlackFester, also the others? For example, is it removing preferentially parenteral plaque versus vascular plaque? And the second, you kind of mentioned your expectation for the NCD, but can you confirm to us that you do not expect the NCD to materially change in its final form versus a draft form? If you can talk a little bit about the process of requesting a change to that entity once we have confirmatory data for the amyloid-beta removing drugs.

Thanks, Ronny. On N3pG4, originally, we started working on this molecule because of antidrug antibodies that we saw and continue to see against donanemab. Because of those ADAs, we have dosed donanemab at pretty high levels and that, in combination with the formulation of donanemab, have precluded the ability of generating a subcutaneous dosing form. So that was an important consideration of those two things, I would say, for the development of N3pG4. It binds the same epitope as donanemab, so our understanding and data suggests that it clears exactly the same types of plaques. That is important to us. I think we have seen compelling efficacy here in TRAILBLAZER from donanemab, and we want more of the same in the next molecule. So no differences here in type of plaque. I think speed of plaque removal, our expectations are it should be similar to donanemab, which is to say, quite rapid. And the big advantage here is likely to be around dosing and administration.

Well, thanks, Ronny. We believe more than likely, the final NCD in April may not change very much. Really what matters most to us is ensuring rapid availability of donanemab for patients with that confirmatory Phase III data. And so that is going to be our focus with CMS. We believe that well-designed and controlled registration trials like TRAILBLAZER-ALZ and ALZ 2 should certainly provide sufficient evidence of clinical benefit for donanemab and that the NCD is not needed or appropriate for donanemab. We are also going to see confirmation with CMS really to your question, once this Phase III efficacy and safety have been established, that donanemab and other medicines with this level of verified evidence would be fully covered by CMS, and we want that path for this coverage to be clearly laid out.

So first, Dan, can you just give us a little bit of the thought process for pushing out the accelerated filing for donanemab, it certainly makes sense. But how much did the NCD actually work into that calculus versus needs or requests from the agency for additional data? And then the second question, just really wanted to get a better understanding of where you guys think this SURMOUNT-1 data set, where the thresholds would be. We are seeing 68-week data from Wegovy coming in at about 15% to 17% in a non-diabetic patient population. Just wanted to get a sense of some of the pushes and pulls that we should be thinking about in the context of the SURMOUNT-1 data set. Thanks so much.

His great. thanks for taking the question. Maybe one follow-up on ondonanemab and then one other 1 unrelated. So in terms of - obviously, I appreciate what you are saying around the accelerated approval and kind of changing your timeline there. I’m just wondering what TRAILBLAZER 4 and if there is any reason, I’m kind of wondering what the rationale for that trial is now given the limited uptake of Aduhelm to this point, we will get data later this year. But I’m just wondering if it makes - if there is any sort of change in strategy or thinking around the need for that trial? And what exactly that might accomplish? And then my second question is sort of unrelated. You mentioned around Olumiant, the updates from last week, but you also have submitted for alopecia areata. I’m just wondering if you could maybe just talk a little bit about what you see for the potential, I guess, for the JAK class overall in that space, but also for Olumiant, specifically, just given obviously the safety concerns we have seen around that product in the class from before?

Yes. Thanks, Vamil. You raised a good point on TRAILBLAZER 4, which is a head-to-head against Aduhelm. Of course, there was a lot of excitement in patient interest and investigator interest in this trial because it is two drugs compared to each other. So on the other hand, as you point out, from a commercial perspective, the importance of showing superiority to Aduhelm may have dramatically diminished. But that is okay. We are still committed to doing this trial. I think from a scientific perspective, there will be important conclusions. We have a hypothesis, for example, that the more rapid and deep plaque clearance could lead to greater improvements on biomarkers. I think those kinds of assessments can only be done in a head-to-head study. So this will still be an important contribution to our overall understanding of Alzheimer’s disease.

Thank you very much for the question. When we submitted Olumiant for alopecia areata to the FDA late last year, and it is now submitted post the European and the Japanese regulatory bodies, but are currently no treatments approved by alopecia areata, we have an opportunity here to be first in disease with Olumiant. And we have been encouraged with the data that we have seen from both BRAVE-1 and BRAVE-2, both based upon physician assessment as well as self-assessment by patients. And that is truly an unmet need in this space. We have currently approximately 360,000 patients diagnosed in the U.S., and we believe that at least 100,000 of those would be eligible for the treatment with JAK. Based upon the profile that we have seen from other assets, we believe that we can launch here with a competitive profile to help patients with alopecia areata.

Hi good morning and thank you very much for taking my questions. The first one is around the N3pG4 in RLAD, you are starting a second agent fairly quickly. Can you talk about other distinguishing features for this product versus donanemab? Is it just that removes BlackFester, also the others? For example, is it removing preferentially parenteral plaque versus vascular plaque.

Thanks, Aaron. We will go to Dan for the first question on N3pG4 and then Anne for the question on the NCD expectations.

Thank you. I assume that you are deep in labeling discussions on tirzepatide. What questions is the FDA asking? Are you anticipating the label to read that tirzepatide is a first-line injectable or for use after other injectables fail? And since another very well-managed diabetes competitor has had supply issues, I’m curious where tirzepatide is being manufactured and whether the plant has been inspected.

Thanks, Steve, for the question. The tirzepatide submission in the U.S. is going quite well. No surprises in that. We are not getting any unusual questions. We are confident in our supply and confident in our supply chain. We will be ready for launch. We did comprehensive studies for our SURPASS-5 pivotal studies for the U.S., so I think that will give us a broad label and the label we need for success. So I think we are progressing quite nicely. We are quite confident going into our launch.

Great, thanks so much. Maybe just following up on the tirzepatide front. Can you just help maybe also set some expectations of the launch as we think about 2022 into 2023? So maybe specifically, how long should we think about post approval until you would expect broad coverage of tirzepatide? And when we maybe compare and contrast, I guess, the last large GLP-1s launch of Ozempic, are there similarities or differences we should think about as hint kind of stay on the market today, the data you will have, etc. just to help us - I think we all think about this as a great long-term opportunity, but more just the near-term dynamics with that.

Yes. Thanks for the question. As we approach the tirzepatide launch, we will be planning for the long term and making sure that we set the foundations up strongly for long-term success. When you have a retail product like this that goes to nearly 100,000 primary care physicians, as well as meeting broad access, there is little that you can do to really accelerate the launch in the first six months. We are also working to get access and having support programs so patients will have a good out-of-pocket experience at launch. And so I wouldn’t look for the first six months to see a real accelerated uptake of net revenue versus other GLPs in that first six months. I think that, that will be a focus for us of just laying strong foundations, being patient-focused, getting access, and driving awareness through a broad subset of physicians that will give us that foundation to be successful long term. And then on insulin, when we look at the Q4 results, we did have a, in particular, a greater-than-usual decline in our price. And that was really due to kind of a double whammy effect. We have significant adjustments from our gross sales to our net sales. And so if our estimates are off just a little bit, that could have a significant impact on our net revenues. And so what we saw actually was that in the comparison period, in Q4 of 2020, they experienced some positive onetime gains. And then in this quarter, we saw some negative onetime adjustments. So, that is what led to what looks like a greater-than-expected net sales decline. I think for our portfolio, we have provided guidance that we would be at about mid-single-digit decline. I think we will see that greater for insulin than our net portfolio, but I don’t see anything largely unexpected in 2022 versus where we have seen the trends over the last couple of years. Thank you.

Maybe just to add something there, Chris, that is a dynamic as well as patient assistance. And as you know, Lilly has led over the last three years with a number of solutions to reduce out-of-pocket costs given the problems in the insurance markets. Those have been in addition to the normal competitive dynamics in terms of gross to net, an important solution for patients actually out-of-pocket costs for - correct me, Mike, if I get this wrong, for patients in the U.S. dropped over the last three years from $34 to $21 per month on average for Lilly insulins. That is quite a bit lower than our competitors, but that does hit the price line for us, either through the now 70% off insulin lispro product, which is available or through the buy-downs we do at the point of sale to $35 per month. So that is in the background. There is sort of a terminal quantity to that, but we have seen good adoption. And I guess the good news is patients are taking advantage of that and it is showing up and retaining volume, it does hit the net price line though.

This is Alice Nettleton on for Tim Anderson. So a question on donanemab. The premise of donanemab is that you only dose to plaque negativity. However, to determine plaque negativity, you need a minimum of two PET scans and quite possibly three, maybe even more. The CMS draft guidance only covers one even if it ultimately gets revised to be more generous. If it doesn’t also include increased coverage of PET scanning, then you could argue Lilly is uniquely disadvantaged versus competitors. Would be curious to hear your thoughts on this.

Well, thanks. And as you said, we are pleased that CMS acknowledged that there is an important role for amyloid PET in patient identification. We certainly agree to that as well. Using amyloid PET to monitor plaque reduction and then confirm clearance is incredibly important, we believe, for patients receiving these therapies. And incredibly important for the health care system because it provides clarity as to when you can essentially stop dosing of medicine. Once you have cleared the target, we believe that is the time to stop dosing.

Thank you. A question on lebrikizumab and then one on Verzenio. So on lebrikizumab, part of the premise in terms of differentiation versus dupi given the IL-3 mechanism is a lower instance of ocular events, particularly conjunctivitis, which are frequent with dupi and problematic for patients. I know you haven’t fully shared the data, but I wonder whether you could talk to whether the data will support that premise and positioning in the market. And then second, in relation to Verzenio, given you are now rolling it out for the adjuvant setting, could you talk to what are the key barriers to adoption among oncologists? Is it tolerability in the adjuvant setting? Is it screening for the Ki-67 patients or are there financial factors and how can you resolve them?

Thank you very much, Andrew. Based upon the data that we have seen so far, we believe that we have a competitive asset with a market leader for atopic dermatitis, and we were very encouraged with the efficacy results with more than 50% of the patients achieving at least an EASI of 75 and also consistent across all the different measures, IgAA, EASI9 and RS and met all the key secondary endpoints. Specific to your question on conjunctivitis, we need to wait for the 52-week data. In the induction data, we didn’t see any difference to existing biologics. But the cases that we saw were all mild to moderate and one-third of those had a history of chronic conjunctivitis and only a few of them discontinued treatment. So we are looking forward to the database lock of the maintenance treatment during the first half of this year.

So I think as it relates to the key barriers to adoption, I think the biggest one in the overlay, and then I will get more specific is just that this represents really the first new standard of care in this setting in 20 years. And so there are just a lot of physicians who have entrenched behavior and comfort with what they are doing. And so the first barrier is really around education and getting a comfort level changing behavior. And so we have a lot of tactics in place to do that to make sure that the data on the agent are known and to answer questions that physicians may have. More specifically, you highlighted a few things that are good things to know, which is the Ki-67 testing requirement and the interpretation of those results and integrating them into patient selection is a new thing for doctors in this setting. As well as the diarrhea management, which is a real phenomenon with Verzenio. We have protocols in place that allow it to be managed and it tends to be a short-term short-term side effect that can be managed. But there are a lot of physicians out there who have literally never written a prescription of Verzenio because they have been historically large Ibrance users. And for that segment, in particular, there is an education component to get them comfortable and ensure they are using the protocols that we think work really well for diarrhea management. That all having been said, we are happy with what we are seeing so far, but it is early days, obviously, in this launch trajectory.

Just have a couple of quick ones. For tirzepatide in obesity, what investments have to be made to help evolve the payer attitudes towards obesity as more of a medical condition, obviously, it has a lot to do with benefit risk, starting with SURMOUNT-1 and you have a competitor leading the charge as well. And then the second question is for partibrutinib. Was the decision to file an MCL, was it based more on unmet need and the opportunity versus regulatory feedback? I want to get a little bit more clarity on that. And with the Phase IIIs and CLL not completing for at least a few years, was there more consideration for those towards an interim look being built in? I’m just trying to think of the potential lag in commercial availability between the two indications.

Yes, it is a good question on obesity and what is going to take to unlock and build that marketplace. When you look at historically, the agent just had kind of limited weight loss. And because of that, they didn’t really drive good health outcomes and that limited access, limited positions from writing that. So we think, first of all, just having agents like tirzepatide that could have significant and clinically meaningful weight loss are the first step in the evolution of the marketplace and the interest in that, and we have seen that in market research. And then we have to begin to build the evidence to show that significant weight loss for tirzepatide will lead to hard outcomes. And that is what we are doing in our extended indication focus. We have announced a heart failure HFpEF study. We announced in December a sleep apnea study as well as an important morbidity/mortality study or MMO study that will look at hard outcomes for other potential outcomes like CV and others; we will give you more information on that coming up. We also have a chronic kidney disease mechanism of action Phase II study that will help demonstrate why tirzepatide may work for that patient population and doing work in NASH. And so I think it is important for us to demonstrate. I think we are confident that with the level of weight loss that we will see with tirzepatide, but that should lead to hard outcomes, that should then lead to earlier use of agents like tirzepatide to really slow and disrupt the progression of obesity and really turn this into a more preventive versus waiting for the heart outcomes to show. But that is going to be the evolution of it. We have got an extensive Phase III program in order to demonstrate the evidence we think we need to - in order to unlock and grow access over time.